Ah, Sweet Mystery of...Taxation

Column by Paul Hein.
Exclusive to STR
Does anyone really understand taxation? For that matter, does anyone really understand anything?
Well, of course, there are many people who understand--really know the truth about--many things. Still, it seems that, regarding taxes, there is a degree of ignorance that surpasses that of the general level of ignorance!
If, for example, you were to ask people why they are taxed, you would find that, in their opinion, taxes are to raise revenue for government. Perhaps those questioned might have read the Internal Revenue Service’s little pamphlet “Why Do I Have to Pay Taxes?” which, however, does not answer the question. It does, though, present a pie-graph of federal expenditures, implying that those expenditures--Social Security, Medicare, law enforcement, national defense, etc.--are financed by tax revenue. The Grace Commission, however, discovered that government “services” are not paid for by taxes, but rather, that money raised via taxation is used to pay interest on the national debt. By keeping current on its interest payments, the government is able to continue borrowing to provide its “services” to its subjects, who are then taxed so the rulers can pay the interest on their debt. A circle, and very vicious!
Sixty-five years ago, the Chairman of the Federal Reserve Bank of New York, Beardsley Ruml, gave a speech to the American Bar Association, which was published in January 1946, in American Affairs. Ruml’s speech confirmed, decades in advance, what the Grace Commission would discover. The title of his talk says it all: Taxes For Revenue Are Obsolete. With a strong central bank, and fiat currency, he pointed out, a government can thrive without any need of taxation for revenue; however, taxation serves other purposes. Ruml listed four such purposes:
1)    As an instrument of fiscal policy to help stabilize the purchasing power of the dollar.
2)   To express public policy in the distribution of wealth and of income, as in the case of the progressive income and estate taxes.
3)   To express public policy in subsidizing or in penalizing various industries and economic groups.
4)   To isolate and assess directly the costs of certain national benefits, such as highways and Social Security.
We must understand that the term “public policy” is a euphemism for “the will of the rulers,” since the wishes of the general population are rarely, if ever, sought in such matters as the “distribution of wealth and income,” or the “subsidizing or penalizing of various industries.” So taxes, as Mr. Ruml saw them, were to be used by the rulers to redistribute income, as well as to assist--or punish!--certain industries, apparently on the basis of whatever ideology was embraced by the rulers at the time. (Would it be too cynical to suspect that the redistribution of income, and rewarding of various industries, might be related to the political support forthcoming from those entities?)
Mr. Ruml was prescient. Today, with the Federal Reserve--the financier of the government--able to produce trillions of “dollars” with a few keystrokes, the government’s dependence upon tax income is, should anyone actually stop to think about it, nonexistent. And taxation as a form of regulation of human behavior is obvious, and applauded by many. A liberal radio talk-show host, Nancy Skinner, has voiced opposition to a value-added tax. Why? Because “it doesn’t produce any behavioral changes. What you want in a tax is a tax that changes behavior.” The cigarette tax is an outstanding example. Recently, the World Health Organization published a paper regarding the alleged dangers of smoking, referring to government policies that “contribute decisively to denormalise (sic) smoking, and help with the approval and implementation of other policies that reduce tobacco demand, such as increased tobacco taxes.”
If taxation of tobacco is an example of Beardsley Ruml’s penalizing certain industries, the manufacturers of (some) automobiles benefit from government subsidies, at least for some models. Buy a plug-in hybrid or electric car, and the rulers will smile upon you with a tax credit, thus encouraging the sale of such vehicles; buy a large SUV for your big family, and pay a “gas-guzzler” tax. In driving your Escalade, are you doing more to support your government than the driver of the Prius? Of course not! The tax you paid was for revenge, not revenue. You made the “wrong” choice, and you had to pay for it.
In 1922, the Drexel Furniture Company employed a 14 year old boy, and was, as a consequence of a newly passed child-labor law taxing firms employing minors, fined $6,000 by the IRS. The firm sued, the case went to the Supreme Court, and the furniture company won. The court declared that “An act of Congress which clearly, on its face, is designed to penalize and thereby to discourage or suppress conduct--cannot be sustained under the federal taxing power by calling the penalty a tax.” What was said at “------” is “the regulation of which is reserved by the Constitution exclusively to the States.” In other words, if Supreme Court rulings are the law, as is claimed, then it is against the law for Congress to impose a tax if the purpose of that tax is to control behavior which falls under state control.
But wait a minute! Isn’t the sale, operation, licensing, and control of motor vehicles within the power of the states? If not, why the state fees to license and operate them? How about the sale, and smoking, of cigarettes? Don’t local laws prohibit smoking in certain locations? If these things are under state and local regulatory power, how can there be a federal tax for the clear and obvious purpose of regulating their use? Are we to conclude that the states have relinquished all claims to sovereignty over their own citizens?
Perhaps beleaguered smokers, forced to pay the federal government nearly 62 cents for each pack of cigarettes, or purchasers of large, “gas-guzzling” cars, forced to pay a hefty penalty/tax, might question whether their state governments are providing them with the protection they deserve! And are there not state agencies that regulate the insurance industry within the state, including health insurance? If so, can there be a federal tax mandating behavior--namely, the purchase of health insurance? It couldn’t hurt to ask! Knowledge trumps ignorance every time.
If you must live your life under the direction and control of strangers, better they be local strangers than rulers at a distance. Even better: that you live under the dictates of your own well-formed conscience.

Your rating: None Average: 10 (1 vote)
Paul Hein's picture
Columns on STR: 78